Northern Steamship Company: The depreciation problem in the nineteenth century

              The Accounting Historians Journal Vol. 13, No. 2 Fall 1986
J. B. Tabb and
C.
B. Frankham
UNIVERSITY OF AUCKLAND NEW ZEALAND
THE NORTHERN STEAMSHIP COMPANY: THE DEPRECIATION PROBLEM IN THE NINETEENTH CENTURY
Abstract: In 1889 a New Zealand company had to write down its paid-up capital by 27 percent, because, the Chairman stated, previous management had failed to allow for depreciation as an expense. An investigation was conducted to see if this capital reduction could have been avoided had the company followed modern depreciation policy. This revealed that the failure to depreciate adequately was not the main cause of the capital reduction, other firms followed the same prac-tice and contemporary English legislation did not permit depreciation as a tax de-ductible item, while United States courts were rejecting depreciation as a valid expense.
One of the oldest firms in New Zealand is the Northern Steam-ship Company Ltd., (Northern) formed in 1881. The company, which is still operating, reported net profits for seven of its first eight years. Then, in 1889, to the shock of its shareholders, the chairman announced the retiring managing director had failed to adequately depreciate the company's ships so that they now appeared in the books at an unrealistically high figure, causing a misleading valu-ation of the assets. Consequently, it would be necessary to write down the company's nominal capital by 27 per cent.
We became interested in seeing whether this unexpected need to reduce the capital by such a large amount could have been avoided had the company depreciated its ships in, what is today, the conventional manner. An investigation of the company's ac-counts from 1881 to 1889 reveals that depreciation had not even been reported as an expense. The directors, in the first eight years, did not deduct any depreciation from net profits, but instead small amounts were debited to retained earnings and credited to depreci-ation reserve, which was treated as part of shareholders' funds. The